To Arbitrate or Not to Arbitrate – That is the Question

Posted on February 17, 2015

Nearly every construction contract these days contains a provision requiring the parties to submit all disputes arising under or related to the agreement to arbitration. Arbitration was once viewed as the better alternative to litigation for resolving construction disputes due its promise to be faster, cheaper, and more specialized. Unfortunately, in recent years, arbitration has failed to live up to these promises, as more complex discovery, lengthy hearings, and exorbitant fees have greatly increased both the costs and time it takes to complete an arbitration.

Cost used to be one of the most often cited reasons for preferring arbitration over litigation. That may no longer be the case, as the expense associated with arbitration has become increasingly burdensome, especially in comparison to the costs of litigation. Indeed, the required initial filing fees for the American Arbitration Association (“AAA”) range from a minimum of $750 (claims under $10,000.00) to over $10,000 (claims between $5-$10 million). These are in addition to AAA administrative fees of $3,250.00 for claims between $1-$5 million, and do not include the arbitrators’ professional fees and expenses, which can easily run into the thousands of dollars per day. Given these costs, it is no surprising that more and more construction disputes are being litigated, where the upfront costs of filing a lawsuit is generally only a few hundred dollars.

But what about the speed and efficiency of arbitration, certainly it must be faster than the court system. Unfortunately, as arbitration became the go to process for resolving complex construction disputes, arbitrators became more prone to allowing the parties to engage in lengthy discovery, involving massive document productions, depositions, and, of course, the inevitable discovery disputes. In addition, as coordinating several days or weeks for hearings involving multiple parties and arbitrators can be a logistical nightmare.

Apparently recognizing these issues as real concerns for those contemplating arbitration as an alternative to litigation, the AAA took action last summer by introducing new supplementary rules for construction disputes. The AAA’s “Supplementary Rules for Fixed Time and Cost Construction Arbitration” places limits on the time and maximum fees allowed in an arbitration, which correspond to certain ranges of disputes. In cases involving multiple claims, the largest of them is used to determine the maximum length of the arbitration, number of hearing days, and costs for the arbitrator and AAA fees.

For instance, if the arbitration demand is between $1-5 million, the maximum length of the arbitration (measured as the time between filing of the demand and the arbitrator’s decision) is 360 days. The hearing would be limited to 10 days, and the arbitrator limited to 40 hours of study time at $350/hour. These figures are contained in Schedule 1 of the rules, published below.

Other notable features of the new rules include:

Arbitration demands and corresponding answers are limited to 5 pages.

An arbitration award must be made within 20 days from the close of the hearings.

The rules only apply to disputes involving two parties (not including a surety that is not asserting any claim of its own).

As the new rules are not even a year old, it is yet to be seen whether they will have any noticeable impact on the manner in which arbitration is handled and perceived. The decision whether to submit a dispute to arbitration, and the terms of an arbitration is something that should be discussed with experienced legal counsel. For questions regarding arbitration, or any other aspect of Ohio construction law, please contact Todd Harpst or Nick Horrigan, at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971 or tharpst@harpstross.com or nhorrigan@harpstross.com.

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